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On 4 March, the apex court sent Roy to judicial custody in Tihar Jail for a week after he failed to spell out a detailed plan for refunding investors who bought bonds of two group companies. Photo: Abhijit Bhatlekar/Mint

The Supreme Court on Friday rejected the Sahara group’s proposal to repay money to its bond investors, and directed it to submit a fresh plan by 11 March. It extended the custody of Subrata Roy, chairman of Sahara India Pariwar, a largely unlisted business conglomerate with 4,799 establishments in its fold and at least Rs.1.52 trillion in assets, including 36,631 acres of land, until he presents a revised plan to refund money to 29.6 million investors. The Sahara group submitted a proposal to repay Rs.2,500 crore in three days and the balance amount in phases every three months.

On 4 March, the apex court sent Roy to judicial custody in Tihar Jail for a week after he failed to spell out a detailed plan for refunding investors who bought bonds of two group companies—Sahara India Real Estate Corp. Ltd and Sahara Housing Investment Corp. Ltd (SHICL)—under a scheme that market regulator Securities and Exchange Board of India (Sebi) ruled illegal. Sahara offered bank guarantees for Rs.22,500 crore to Sebi and proposed to help verify information about investors by deputing “hundreds of competent workers” to assist the regulator.

Six years ago, when the Reserve Bank of India (RBI) had shut Sahara India Financial Corp., the group’s non-banking finance arm, with at least Rs.17,500 crore in deposits, the repayment process was smooth for an investor base bigger than the current one—some 39.4 million people. Interestingly, the cluster of Sahara’s investors is the same. Sahara claims that those who had kept deposits with the non-banking arm also subscribed to its bonds and this is why the group considers them as “associates”, while justifying their investment in the so-called private placement of bonds, but the Supreme Court suspects there is no genuine investor.

After a brief courtroom drama, first in Allahabad high court and later at Supreme Court, in June 2008, RBI had directed Sahara not to accept any new deposit that matures beyond 30 June 2011, and stop accepting instalments of existing deposits also with effect from that date. The company was directed to repay the deposits as and when they mature and bring its liability to zero before 30 June 2015. Sahara also replaced the company’s auditor and reconstituted its board. H.N. Sinor, former managing director of ICICI Bank Ltd; T.N. Manoharan, a chartered accountant and founding partner of Manohar Chowdhry and Associates; and Arvind K.D. Jadhav, a 1970 batch Indian Administrative Service officer, and former mining secretary and chairman of Maharashtra Water Resources Regulatory Authority, joined its board as independent directors.

The RBI forced all these changes on Sahara because of its continuing alleged violations of investment norms. The banking regulator had accused Sahara of not following rules regarding the payment of the prescribed minimum rate of interest to depositors, asset-liability management guidelines, the so-called know your customer (KYC) norms for opening deposits, and failing to intimate depositors when their deposits matured.

The primary job of the directors was to ensure that the depositors’ interest was protected by smooth repayment through sale of government bonds and securities. Sahara was forced to sell some assets to generate liquidity but that was not enough to pay depositors. By 2010, Sahara got a Rs.1,800 crore refund from the income tax authorities, which it had paid under protest. The money offered it a huge cushion against redemption. By the time Sinor and Manoharan left the board in October 2011 (Jadhav had left much earlier), Sahara’s deposit liability came down to about Rs.2,000 crore and its net-owned funds rose Rs.3,000 crore. By December 2013, only Rs.768 crore was left to be paid. Indeed, the directors were concerned about unclaimed deposits (as on 31 March 2011, there were 93,43,776 depositors who hadn’t submitted their claims for Rs.952.86 crore), but they did not come across a single instance of KYC violation.

The repayment to 29.6 million bond investors, in contrast, has been complex and fraught with controversies right from the beginning. In November 2010, Sebi banned the Sahara group from raising money from the public in any form and, in June 2011, the regulator asked it to pay back investors with 15% interest. In October 2011, the Securities Appellate Tribunal (SAT), the appellate body, upheld the market regulator’s order and directed the two Sahara firms to refund Rs.24,029 crore within six weeks. This was eventually endorsed by Supreme Court judges K.S. Radhakrishnan and Jagdish Singh Khehar in August 2012, who asked the group to furnish details of investors who had received the money and Sebi was to validate such claims. Sahara has all along claimed that Sebi has nothing to do with the group’s money-raising activity through the so-called optionally fully convertible bonds, which was done under the watchful eyes of the ministry of corporate affairs and with the express sanction by the registrar of companies in different Indian states.

Reluctantly, Sahara first sent truckloads of documents to Sebi as proof of its payments to millions of investors, then deposited Rs.5,120 crore with the regulator, and finally claimed to have paid all investors in cash using the money raised by other group firms but still it has not been able to satisfy the Supreme Court, which wants to see the money.

There are two key differences between the two payment settlements. First, the depositors were paid over years while the bondholders repayment is envisaged within a short span of time. Secondly, Sahara itself paid the depositors under the supervision of its independent directors while Sebi has been entrusted with the task of paying the bond holders. Sahara claims Sebi has not made any serious effort to identify depositors with the help of the group and pay them their dues while Sebi’s contention is that the letters sent to thousands of investors have either not been delivered or not responded to.

At this juncture, one feels tempted to ask many questions. Since the Supreme Court suspects the investors in bonds are fictitious, has Sahara changed its business model? Were the investors in deposits genuine and in bonds fake? Is Sahara the Swiss Bank of India where the high and mighty keep their unaccounted money and millions of investors have only lent their names? Only a thorough probe by the investigative agencies can answer these questions.

While being sent to Tihar Jail, a highly emotional Roy said this is his reward for expanding financial services and reaching out to the masses and his patriotism. Those whose hearts bleed for Roy and his group are saying that by transferring the money to the Consolidated Fund of India, the nation is using the group’s resources to bridge the fiscal deficit. While these are conjectures, nobody will deny the fact that the latest developments have dealt a blow to Sahara’s business model, eroded its brand built over decades through its association with cricket, Bollywood and corporate social responsibility activities and the group is possibly left with no choice but to firesale its assets in India and overseas to get out of the situation that it has found itself in—the gravest in its 36-year history.

Sahara has filed a defamation suit in the Calcutta high court against Tamal Bandyopadhyay and obtained a stay against his forthcoming book Sahara: The Untold Story that he has written in his personal capacity.

Sahara has filed a defamation case in a Patna court against Mint’s editor and some reporters over the newspaper’s coverage of the company’s dispute with Sebi. Mint is contesting the case.

Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author of A Bank for the Buck, a book on HDFC Bank. Email your comments to bankerstrust@livemint.com